Rappaport v. Pasternak, ___ N.J. ___ (2025). Justice Patterson’s opinion for a unanimous Court today arose out of the arbitration of a dispute among members of limited liability companies. After the arbitrator made his award, the Chancery Division confirmed that award. But the Appellate Division, which viewed the record as showing that the arbitrator had improperly ruled on an issue not presented by the parties, modified the award. On further review, the Supreme Court reversed the Appellate Division and reinstated the Chancery Division’s confirmation of the award.
Without getting into the nitty-gritty of the detailed facts and tortuous procedural history, the issue that the Appellate Division perceived had been raised by the arbitrator rather than the parties related to a question of carried interest. Plaintiff, to whom the arbitrator made a seven-figure award after netting out the parties’ respective claims against each other, had sought $25 million more in carried interest from defendants. Justice Patterson quoted at length from plaintiff’s own testimony and other aspects of the arbitration proceedings in which plaintiff had presented the carried interest issue. The arbitrator considered that issue but declined to award any amount for carried interest.
Plaintiff sought modification of the award, asserting (as Justice Patterson summarized) that “the arbitrator’s decision that he was not entitled to carried interest exceeded the parameters of his authority and that the award should be modified. He stated that he was ‘not looking for a number amount to be placed on the carried interest at this point,’ but ‘simply seeking to clarify’ that the arbitrator’s interim award entitled him ‘to his proportional share of the carried interest when it becomes due ….’”
However, the arbitrator had determined that there would be a “toxic” atmosphere in the business entities if plaintiff remained there. The arbitrator declined plaintiff’s demand that he be reinstated in the entities and advised the parties to “to put these events behind them and continue on with their professional and personal lives.” That meant that plaintiff would not get carried interest as he would no longer be associated with the businesses.
The Chancery Division found that plaintiff, not the arbitrator, had raised the carried interest issue at the arbitration. The Appellate Division reversed. The Supreme Court then granted certification.
Justice Patterson observed that, as “all parties have acknowledged during the proceedings before this Court,” the Appellate Division had “mistakenly attributed to the arbitrator the questions about carried interest that were actually posed by Rappaport’s counsel to Rappaport during his direct examination on the arbitration’s first day. Based on its reading of the record, the appellate court concluded that the arbitrator had sua sponte raised the question of carried interest in the arbitration. It viewed Rappaport’s $25 million estimate of the value of his carried interest to be an attempt to ‘respond to the arbitrator’s question by giving him a ballpark figure.’ The appellate court ruled that no party had presented testimony regarding Rappaport’s equity interest in the [business] entities.”
The question for the Supreme Court thus came down to whether the standards for modifying an arbitration award were satisfied here. Justice Patterson discussed at length the two leading cases regarding appeals from arbitration awards, Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479 (1992), and Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349 (1994). In the former case, Chief Justice Wilentz had advocated in a concurring opinion for an extremely limited scope of review of arbitration awards. In Tretina, a majority of the Court adopted his concurring view. Under that view, Justice Patterson said, “[a]n award may not be vacated or modified simply because a court disagrees with the arbitrator’s interpretation of the law or view of the facts; unless the statute’s specific requirements for vacating or modifying an award are met, the award must be confirmed.”
Justice Patterson noted that the Appellate Division had “modified the award pursuant to N.J.S.A. 2A:23B-24(a)(2), holding that the arbitrator’s ruling on carried interest constituted “an award on a claim not submitted to the arbitrator,” and that “the award may be corrected without affecting the merits of the decision upon the claims submitted.” But neither of those statutory requirements was in fact satisfied.
As discussed above, plaintiff had raised the carried interest issue throughout the arbitration, beginning with his opening statement, plaintiff’s own testimony, and on various other occasions, through and including post-hearing submissions, as Justice Patterson detailed. And the award could not be corrected without affecting the merits of the arbitrator’s decision. As the arbitrator had made clear, including via his advice to the parties to put their dispute behind them, “the arbitrator intended to grant the ‘business divorce’ that defendants sought and to ensure that Rappaport would no longer participate in the [business] entities. The Appellate Division’s decision undid that resolution; it would require the parties to maintain a business relationship the arbitrator deemed ‘toxic’ as long as any … entity survives.”